Apple iPhone 5 Now a Golden Goose for Verizon and AT&T

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Since the debut of the iPhone in 2007, the profit parade has mostly been a one-way street – but after five years, the major wireless carriers finally figured out how to make money with the Apple iPhone 5.

Apple has raked in billions while first AT&T Inc. (NYSE: T), and later Verizon Communications Inc. (NYSE: VZ), and Sprint Nextel Corp. (NYSE: S), had their margins slammed by the huge subsidies they sent to Cupertino.

But evolving consumer habits and the Apple iPhone 5's addition of LTE network technology will soon change that in a big way.

The carriers are hoping the much higher data transfer speeds of LTE – approximately 10 times faster than 3G – will coax iPhone 5 owners to use more data-heavy functions, particularly video.

"With these great networks coming on, [data] usage is going to go up. Revenues will go up," AT&T Chief Financial Officer John Stephens said at recent media and communications conference.

While the carriers will still have to fork over the same fat subsidies to Apple they always have, the new data equation means they'll make the money back much more quickly. And that will translate into bigger profits.

"Given usage-based pricing and shared data plans, we believe the carriers will be able to monetize this opportunity to the tune of $50 billion, most of which should accrue to Verizon and AT&T," UBS analyst John Hodulik wrote in a research note earlier this month.

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Apple iPhone 5 Will Gobble Data

The carriers' optimism is well-founded.

Hodulik believes the iPhone 5 – which went on sale Friday, and according to Apple sold 5 million units over the weekend – and other LTE-equipped smartphones will drive a five-fold increase in data traffic in the United States over the next five years.

Of the three major U.S. carriers, AT&T figures to benefit most from the iPhone 5. In the June quarter, AT&T sold 47% of the iPhones in the U.S., Verizon 34% and Sprint 19%.

Even without LTE, iPhone users historically have scarfed up much more data than users of other smartphones.

A report by media and technology specialist Analysys Mason released in May said iPhone users comprise 80% of the top 10% consumers of data.

The report added that among the most data-hungry smartphone owners — those in the 70th percentile and up — there were three times as many iPhone owners as the next largest group, HTC owners using Android.

To get an idea of how LTE will amplify data use on the iPhone 5, consider that a study earlier this year by analyst firm Validas showed HTC Thunderbolt LTE owners used twice as much data as iPhone owners on 3G networks.

"It is often the case that when a faster network presents itself, customer appetite for data tends to follow," Bob Azzi, Sprint's senior vice president of network told The Wall Street Journal.

AT&T, Verizon Crave LTE Payoff

The carriers have made several moves in recent years that should crystallize with the iPhone 5.

For one thing, the carriers have introduced upgrade fees to discourage customers from upgrading to new phones before their contracts are up. Verizon's fee is $30, while AT&T's is $36.

"[The carriers] don't want to be paying an estimated $400 every time someone buys a new iPhone," said The Journal reporter Anton Troianovski in a NewsHub segment. "So what they've been doing is making it harder, more costly to upgrade if you're an existing customer."

The carriers have also been eager to reap a return from the billions they've spent building out their LTE networks.

While LTE smartphones have been available for over a year, adoption of the technology has been slow. For example, at the end of June only 12% of Verizon's 89 million customers were using LTE.

With its high profile and mammoth sales, the Apple iPhone 5 will help LTE make the jump to the mainstream.

Turning Data into Profits

At one time, the carriers made most of their money from selling phone minutes and text messages.

But that has been changing as network technology has improved. Since the debut of the original iPhone in 2007, data revenue for the U.S. carriers has more than tripled from $5.2 billion to $17.1 billion.

The carriers have been changing their subscriber plans accordingly. Where once plans with limits on minutes and texts — but unlimited data — were common, now the reverse is true. Plans offering unlimited data are rapidly vanishing.

For the iPhone 5, only Sprint offers unlimited data for all its plans (a selling point to compete with its larger rivals). Verizon, by contrast, offers tiered plans based entirely on data usage. The cheapest plans for both AT&T and Verizon offer just 300 megabytes of data per month.

It's easy to reach the ceilings of these low-end plans very quickly on LTE.

A report in PC World noted that streaming video on Verizon's LTE network can suck down 100-200 megabytes of data in only 10 minutes. People using Apple's built-in video chat app FaceTime could eat up 250 megabytes in about 90 minutes.

That should encourage migration up the plan tiers — profit gravy for Verizon and AT&T. And there's a bonus: LTE is more efficient than 3G, making it even more profitable for the carriers.

"The startlingly uniform behavior of operators in abandoning unlimited plans and moving to volume-based tiers en masse indicates the emergence of a new era of pricing power for mobile data," Richard Dineen, an analyst at HSBC Global Research wrote in a July report. He estimates tiered pricing could boost Verizon's revenue by as much as 3% by 2015.

"Coming from a legacy of zero pricing power in mobile voice, this is a very positive development for mobile stocks," Dineen said.

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